The Global Media Weekly for executives and entrepreneurs

What FT’s success says about future of newspapers

We should not be side-tracked by the one-dimensional debate about whether newspapers will survive or not. They will. But almost everything will be different. Consider: the hundreds of millions of readers of Huffington Post, Twitter and the soaring BuzzFeed ; the growth of free or low-cost ‘McNews’ papers; and the profusion of online picture galleries, digests and news feeds.

The style and scale of these new media identify a fundamental change in news appetites. Traditional media people may sniff at the news-in-pictures and ‘listicles’ of BuzzFeed even though, in the UK, The Sun editor said last week it was the best thing on the web. The fast-growing (and profitable) site now has more than 85million monthly uniques  –  already 50% more than BBC News online. Some newspapers may think they’re not in the same game, but that might just be the point.

The sharply reduced circulations of newspapers and their (mostly) modest digital ventures highlight a media category in distress and in need of more radical change than most have yet contemplated. It is now clear that, if they are to meet the needs of the BuzzFeed generation, news companies must change in print as well as online. The widening differences in content and revenues will increasingly drive the divergence of the two channels. And there will be a lot more fresh thinking about news from the growing number of entrepreneurs snapping up legendary newspapers.

Expect Richard Branson, Google’s Larry Page, Ebay’s Pierre Omidyar, and Australia’s mining empress Gina Rinehart (already a disgruntled shareholder in Fairfax) to be among those rushing to join Jeff Bezos, John

Henry and Warren Buffet in the news revolution. Smart people are lining up to prove they can do it better. And, for many newspaper incumbents – long accustomed to planning media ‘convergence’ – it may be time to do almost the opposite.

Long-form “contextual” and analytical reading for domestic audiences might remain predominantly the stuff of quality newspapers in print – or in tablet editions which replicate hard copy. But hot news will increasingly be at the heart of bespoke, “live” online services spanning reference information, social networking, TV, movies, and retailing. Those multimedia “portals” could come from newspapers, broadcasting – or neither.

Quality newspapers will be almost wholly dependent on copy sales and subscriptions, while popular tabloids will increasingly be advertising-funded and free or very cheap. That “readers-pay-for-quality” / “advertisers-pay-for-popular” split is already evident in some emerging global news services.

These fast-developing trends underline the need for substantial further change in the world’s newspaper companies:

  • The divergence of news between hard copy (packages) and online (services) dictates the need for more separate development. Increasingly, video-rich online operations will be led by digital natives. But hard copy also needs its own generation of “disruptive” management focused on halting the slide in readership, revenue and profitability.
  • The new or re-formed media will require completely new business models and cost structures, not mere tweaks of the status quo.
  • Newspaper publishers now know they are far from the only companies able to exploit these opportunities. The new competitors come from across the spectrum of companies with mastery of the technologies and audiences. And, with still substantial newspaper revenues rendered under-profitable by historically high costs, many more natives won’t be stopping at digital.

The news business is becoming a new business.

The challenge for newspapers was laid bare at the World Publishing Expo in Berlin last month when two European media CEOs were asked: “On a scale of 1 to 10, how far along is your company in the digital transition?” Andrew Miller, of The Guardian, said 3 and Mathias Doepfner, of Axel Springer, said 4. Modest, realistic, pessimistic or what?

The urbane Springer CEO, whose digital revenues overtook print for the first time this year and who has just sold a slew of declining newspapers and magazines for almost €1bn, was then asked to sum up the chances of all his digital activity producing a “happy” result. The answer was one word: “Perhaps”.

These two companies – one a German, family-controlled, increasingly international, media group with revenues of €3bn; and the other a £200m UK charity-owned, pure-play news provider – have contrasting strategies, even though both have been predominantly newspaper companies. Springer is now a diversified media group, a decreasing proportion of whose profits are derived from news, let alone from newspapers.

It is one of Europe’s largest and fastest-growing media companies, whose profits have almost doubled in the past four years. Its progress from a company founded on the success of Bild (still Europe’s largest-selling daily newspaper) can be judged by the fact that 35% of profits are now derived from international operations and 37% from digital.

Axel Springer is a company escaping its dependence on news, while The Guardian is a newspaper trying to escape its dependence on print. They are joined, though, by their drive to capitalise on newspaper traditions through fast-growing digital media which, in each case, is now more than compensating for the loss of hard copy revenues.

But that’s where the similarities end.

The Guardian’s two loss-making newspapers (The Guardian and The Observer), with some 600 journalists, are underwritten by the profits from a historic 50% investment in the £1bn digital service Auto Trader.

Basking in the glow of acclaim for its recent coverage of Edward Snowden’s intelligence leaks, The Guardian is building a worldwide news brand with a fast-growing online readership in the US, UK, Australia and elsewhere. A video interview with Snowden was viewed over 7 million times on the newspaper’s excellent (free) web site. Before that, the left-leaning daily had played a Washington Post-like role in exposing the UK’s News of the World phone hacking scandal.

As if to contradict my assumption that global “quality” news content will tend to be funded by readers rather than advertisers, The Guardian’s digital ads last year grew more than twice as fast as the rest of the market. But the whole operation is still some way from profitability. The growth of cross-border online advertising will, though, further encourage Mail Online, the UK’s Daily Mail spin-off whose dramatic global audience (now totalling more than 150m monthly uniques) has yet to be monetised. Nor is the loss of print advertising yet being compensated by the growth of online. But it’s getting closer.

The Daily Mail’s owner DMGT – with a track record of devolved management, light-touch control and long-term investment – has been moving strongly towards its high-margin B2B operations which now account for  almost 80% of profits. But it is making huge waves too in ‘new’ consumer media, with Metro (the free daily which is the UK’s most profitable newspaper), rapid expansion in Zoopla online property services – and the MailOnline search for a profitable model in global news and celebrity gossip.

In that sense, DMGT is more like the ever-profitable Axel Springer. And, perhaps even more so, the Scandinavian wonder group Schibsted which is storming across the globe with market-leading online classifieds operations in 29 countries. Digital now accounts for 45% of all Schibsted revenues and 61% of profits. More than half that is from classifieds which are now 52% of profits. This little-known company which has leapt from its modest heritage of daily newspapers in Sweden and Norway, is now one of the world’s seven largest news companies – and probably the best.

Schibsted’s success is the kind of reinvention that Rupert Murdoch must have dreamed about while he was building phenomenal film and TV profits in the US. Now, with his mighty empire divided between 21st Century Fox and the “new” (i.e. mostly old) News Corporation, Murdoch has his work cut out. As his latest newspaper results (don’t really) show.

The Australian blog Crikey has revealed that, in the year to June 30, the newly-demerged News Corp actually lost almost £500m. Crikey says News Corp concealed this apparent loss by using the £1.25bn spent buying an additional stake in (Aussie pay TV operator) Foxtel to create a one-off book gain so large that it offset a £137m write-down in the value of its Australian newspaper assets.” The creative accountancy cannot conceal that advertising revenue, which makes up half of its total revenue, fell almost 9% to £1.7bn.

News Corp straddles the US, UK and Australia and, symbolically, its flagship newspapers in each country (The Times, The Australian and the New York Post) are together estimated to be losing more than £150m a year. So, Rupert Murdoch now looks less like a news industry pioneer than at any time in the 45 years since he left Australia to conquer the world. That is reinforced by the absence from any list of would-be global news services of The Times, arguably still the world’s most famous newspaper.

Perhaps Murdoch’s pain is a measure of the uphill task for many of the world’s newspaper groups as they ponder the future.

Even impressive (and still profitable) newspaper groups are finding it tough. The New York Times – like The Guardian and the Daily Mail – is pitching for that global role (with its International Herald Tribune now rebranded as the International New York Times). Its readership revenue was recently reported as having grown by 5%, and the number of paid subscribers to the company’s digital-only packages (including website, e-reader and other digital editions) was 727,000 – a jump of more than 28% in 12 months.

It reported that readership revenues are now more than compensating for the loss of advertising (the gold standard of digital progress in the newspaper business). But advertising decline pushed the company into a quarterly loss; and online ads are declining even faster than print.

So, while it’s clearly still tough for a newspaper to forecast the rate of advertising decline (apparently even in digital), the New York Times is proving something important: that readers, whose relatively low cover prices have long been subsidised by advertising, are prepared to pay higher prices for content they really want. That is a lifeblood issue for newspapers everywhere.

No publisher better understands this drive for quality paid-for content than the London-based Financial Times (known as the FT), whose weekday cover price has increased from £1 to £2.50 (£3 on Saturday) in six years – following a four-year standstill. This strategy, which saw the salmon-pink newspaper increasing its price no fewer than four times in 2007-8, has had predictable impacts on circulation (down) and profitability(up).

Its parent company Pearson Plc said recently that the newspaper circulation “has achieved profitability this year for the first time ever” – with revenue exceeding print, production and distribution costs, despite falling sales. It highlighted the 24% growth of the FT’s digital subscriptions to more than 387,000. Aggregating print and online, the FT had achieved the highest “circulation” in its 125-year history at nearly 629,000 –  up 5% year-on-year.

Registered paying online users climbed 29% to 4.8 million. Mobile devices accounted for 25% of traffic to, while there were 2.7 million users of its “web app”, beyond the reach of the Apple newsstand. The FT’s upmarket magazine’s online offshoot How to Spend It grew advertising revenues 41% year-on-year in the nine-month period up to September. All this, while the print circulation continued to fall by 14% to 256,478 in March-August 2013. The year-round average by the end of October had fallen again to 242,873 with circulation split essentially three-ways between the UK, Continental Europe and the US.

So, although the FT is a business paper, its fortunes have mirrored many other dailies around the world. During the good times, its revenues were buoyed by advertising. But, even then, it managed to be loss-making or barely profitable in many years – because of  what might be described as defensive cover pricing.

During the years when the newspaper was selling for 90p, the then Pearson chief executive Marjorie Scardino witnessed a dinner conversation where business people were trying to guess the FT’s cover price. The guesses, most of which were closer to £2 than £1 betrayed the newspaper’s unrealistic pricing – and its potential to move towards a price that readers thought they were already paying.

Whether the more recent switch of strategy is successful, however, will depend on whether circulation soon stabilises – and on digital sales.

FT editor Lionel Barber recently announced the launch of a single edition, global print product from 2014, to replace the current five editions in the US, UK, Europe, Middle East and Asia. He described the dramatic change planned in how the FT produces its news: “Overall, these changes will mean that much of the newspaper will be pre-planned and produced. Production journalists will publish stories to meet peak viewing times on the web rather than old print deadlines. The process will be akin to a broadcasting schedule. Where once we planned around page lay-outs, we will now adopt a news bulletin-style approach. We will shift further away from reactive news gathering to value-added ‘news in context’.”

Barber said the newspaper would be produced by a small print-focused team, while a bigger staff will work in an ‘integrated web/day production’ team: “The 1970s-style newspaper publishing process – making incremental changes to multiple editions through the night – is dead. In future, our print product will derive from the web offering – not vice versa.”

The plan which follows on from the 2013 launch of “fastFT”, a web service promising “market-moving news and views” 24 hours a day, confirms the Financial Times as one of the newspaper frontrunners in the shift to digital – and the painful quest to reduce its reliance on advertising (now 30% of total revenues). The rationale is supported by the fact that, of the FT’s 600,000 subscriptions, more than half now are digital. But advertising is at best flat and a long way down from just a few years ago.

It’s a fascinating case study for the development of newspapers in this digital century, and outgoing CEO Scardino was fond of spruiking the FT to investors even though it is less than 5% of group revenues. But then that’s been the Pearson pattern almost since the one-time 19th century international construction firm (ports, tunnels, bridges and railroads) bought the newspaper in 1957, “as a sound, conservative investment”.

The newspaper had been launched in 1888 and first chose ‘tinted’ paper five years later – because it was cheaper. That year, it became the first London morning paper to be composed on the revolutionary linotype machine (‘hot metal’), saving cost and production time.

For all the FT’s financial turmoil across the last 56 years, it has always looked secure in the Pearson group which knows more than most about trophy assets. Its amazing business portfolio has ranged across companies in investment banking, tableware, winemaking, television, offshore oil, computer games, and leisure parks – as well as books and regional newspapers. Businesses like Chateau Latour, Royal Doulton, Madame Tussauds, and Lazards have all been Pearson subsidiaries in the last 25 years.

It all sounds like the whimsical investment strategy of a blue-blooded British family and so it was, until comparatively recently and certainly well beyond the Pearson IPO in 1969. But the fun doesn’t stop there. Rupert Murdoch spent much of the 1980s as the company’s biggest shareholder hoping his 15% would persuade the Board to sell him the Financial Times but they refused even to give him a seat on the Board.

By 1990, Murdoch had the next laugh when his Sky satellite TV (closer to bust than anyone then realised) effectively swallowed up the ‘official’ but profligate British Satellite Broadcasting which had been expensively backed by Reed International, Granada TV – and Pearson.

In 1994, there was more folly when Pearson’s then 64-year-old CEO Frank Barlow (the first Pearson boss to be appointed from beyond the company’s founding family) waxed lyrical about the emerging computer games market. He then splashed out $500m (5 x revenue) on an erratic California company called Software Toolworks, whose Nasdaq share price had fluctuated between $2 and $12 less than a year before. The whizzy business did little other than lose money for its new owner. But it took four years – and a new CEO – for Pearson to abandon its games strategy and sell the business off for 20% of its total investment. Shareholders wanted a new approach and got it.

All the child’s play is now behind Pearson, after a steady, unflashy 15 years with Marjorie Scardino at the helm. The £10bn company is the world’s leading educational publisher, and a 47% shareholder in the largest book publisher, formed by the merger of its Penguin subsidiary with Bertlesman’s Random House. It publishes the FT and also has a 50% share of gilt-edged weekly The Economist.

While new Pearson CEO John Fallon has not inherited the random collection of assets which greeted his predecessor 16 years before, he might be reflecting on Ms Scardino’s super timing. After years of extolling the virtues of Pearson’s concentration on all things education, stockmarket analysts are now telling investors to “sell” the shares because of weakness in the US education market. As they do.

Knowing that such pressure on the group’s core business will inevitably cast a spotlight on the FT, the new CEO has been quick to deny rumours of a sale variously to the Abu Dhabi Media Company and, yes, Rupert Murdoch’s News Corp (owner now of the head-on rival Wall Street Journal). But Fallon’s strategy to sell the subscriptions-based MergerMarket information service, which looks like nothing so much as a core Financial Times activity, inevitably raises the heat further. And doubts about the FT’s future ownership are hardly reduced by the restructuring plan to put the newspaper into a new Professional division so Pearson “can tap the substantial market for learning among globally-minded business people.”

Ironically any Pearson success, say, in selling MergerMarket for £300m or more (it was bought for £101m seven years ago) would vindicate the new CEO’s decision to sell. But the new CEO knows also that such a disposal price would also increase the pressure on him to sell his ultimate trophy asset, the Financial Times itself.

Fallon might now be bracing himself for this – or at least for the probability that he will start to receive the kinds of unsolicited offers (anything above £500m) that cannot easily be refused. Might he, even now, be lining up a new education- market acquisition to make the FT disposal thoroughly worthwhile?

The FT is a substantial business which has out-performed most of its peers and has moved impressively in the shift from print-to-digital. It is, however, too tempting to point out that the financials of the newspaper, whose journalists are so good at critiquing corporate weakness, are not quite as impressive as they seem. Last year, the so-called “FT Group” made £49m operating profit from a turnover of £443m (11% margin). That was down by 33% on £74m in 2008. But that’s only part of the story.

Almost 50% of the 2012 “FT Group” profit came from its share in The Economist, which is generating profits of £68m (19% margin) on revenues which have risen by 10% in the past five years.

So, allowing for a profits from the soon-to-sold MergerMarket and from conferences, training and publications like Investors Chronicle and The Banker, it is likely that the FT itself is making profits of not more than £10-15m from turnover of perhaps £200m – and more than 50% of that may be derived from the weekend edition whose full-price sales are almost double those of the weekday and at a 20% higher cover price.

From the perspective of a Pearson shareholder, therefore, the company’s most famous brand may be either sub-scale in profit, too problematic – or (still) worth “too much” to would-be acquirers.

When he denied the FT was for sale, the Pearson CEO may actually have added a bit too much information: that he had not been approached for it. Which sounded just a little bit like an invitation to would-be bidders. Whatever, there are at least 4 reasons why we should predict the sale of the FT during the next 12-18 months:

  • The divestment of the Penguin Books division into the Penguin Random House joint venture with Bertlesman and the impending sale of MergerMarkets leave the daily newspaper looking distinctly exposed and “non-core” alongside Pearson’s profit-dependence on education, predominantly in the US. Grouping the FT with the parent company’s “professional education” is a mere fig leaf.
  • The falling profit of the newspaper (excluding The Economist stake which can anyway be retained or sold for a rich price) risks embarrassment – and, over time, a falling disposal price.
  • Now the company’s focal educational businesses are under pressure, investors will be pressing Pearson to put the newspaper up for sale – or to accept any reasonable, unsolicited offer that may arrive. Since some observers think an auction price would be in the range £50o-750m, few shareholders would hesitate to support such a process.
  • Now Michael Bloomberg has retired from being Mayor of New York, he will be getting twitchy. His $7bn-revenue financial information group (which bought Business Week magazine) is a likely bidder for the FT. If not, perhaps his arch-rival Thomson Reuters. And, of course, Rupert Murdoch’s News Corp, the Abu Dhabi Media Company, sovereign wealth funds from Qatar to Singapore – and the odd digital native  – might all want to get involved.

Perhaps the whole saga says something about the future of major daily newspapers in general. Advertising, in the future, will always be a much smaller proportion of revenues than historically, whatever the print-to-digital split.

So, even at their best, daily newspapers and their digital services will be smaller businesses – and, shorn of their advertising, less capable of high-growth.  That is why some dailies may have more value to companies with other levers of profit – including pure-play digital businesses. After this week’s announcement that an Australian pension fund is launching a serious online news service, how long before such a company buys a daily newspaper?

This will be the decade during which the ownership of many legendary newspapers will change; and some are surely set to become promotional weapons, trophies, or ancillary activities for prosperous companies and individuals.

The Financial Times is one of the world’s most successful and digital-savvy newspapers. But that may only increase the likelihood of it changing hands. That’s a measure of what is coming to the news business.